Karnataka State Industrial Investment & Development Corpn. Ltd. v. Cavalet India Ltd. And Others

Y.K Sabharwal, J.— The question that arises for consideration in these matters is whether the Karnataka State Industrial Investment and Development Corporation (for short “KSIIDC”) acted in a bona fide manner in sale of the properties of the borrower exercising its right under Section 29 of the State Financial Corporations Act, 1951 (for short “the Act”).

2. The appeals have been preferred by KSIIDC as well as M/s Vinpack Investments Pvt. Ltd., the purchaser (for short “Vinpack”) against the judgment and order of the Division Bench of the Karnataka High Court directing KSIIDC to undertake the entire sale process once again and give opportunity to Respondent 1 to bring better offer for the properties.

3. Respondent 1 M/s Cavalet Industries Ltd. (for short “the borrower”) borrowed a sum of Rs 116.30 lakhs from KSIIDC as per the sanction letter dated 22-4-1991. The borrower committed defaults in payment of the instalments and, therefore, KSIIDC on 30-3-1995 passed an order under Section 29 of the Act for taking over the unit of the borrower for recovery of its dues. However, KSIIDC did not implement that order. There was considerable correspondence between KSIIDC and the borrower, in regard to the offers of some third parties, who were proposing either to purchase the unit or enter into some working arrangement with the borrower to run the unit. The efforts of the borrower to enter into arrangement with third parties to work the unit did not yield any result. The borrower also did not clear the dues and, therefore, KSIIDC passed another order dated 30-10-1996 under Section 29 of the Act for taking over the unit to recover a sum of Rs 98,36,636 which was due as on 24-5-1996 and in pursuance of the order, possession of the unit was taken over on 14-11-1996.

4. KSIIDC between January and December 1997 viz. a period of about one year issued three advertisements for sale of the unit. Suffice it to note that out of all offers, ultimately Vinpack, after negotiating increased its offer to Rs 171 lakhs which was accepted by KSIIDC by its letter dated 8-10-1998.

5. The borrower filed the writ petition on 4-11-1998 for declaring the sale as void, illegal and contrary to Section 29 of the Act. On 18-11-1998, the borrower filed an application for directions to keep the premises open as some prospective purchasers desired to inspect the unit. The application was allowed and KSIIDC was directed to keep the premises open during the period directed by the High Court. The borrower did not bring any concrete better offer. An affidavit was, however, filed by the borrower offering to purchase the unit on the same terms on which KSIIDC had agreed to sell the unit to Vinpack. Though KSIIDC did not accept the offer, but the learned Single Judge by judgment dated 29-1-1999, on consideration of factual and legal position, held that since there was non-compliance with the guidelines laid down in Mahesh Chandra v. Regional Manager, U.P Financial Corpn. (1993) 2 SCC 279 the borrower was entitled to an opportunity to make an offer on the same terms on which KSIIDC had finalised the same with Vinpack. The learned Single Judge issued directions fixing the sale price at Rs 171 lakhs. The first instalment of Rs 30.50 lakhs was to be paid on or before 20-2-1999. The borrower was also given liberty to bring a third party making a better offer. It was further held that if the borrower failed to bring a better offer or agree to buy the unit or if the first instalment is not made to KSIIDC on or before 20-2-1999, KSIIDC would be at liberty to proceed with the sale in favour of Vinpack. The borrower failed to avail the opportunity granted in the judgment of the learned Single Judge. Therefore, KSIIDC sold the unit to Vinpack on 25-2-1999.

6. Subsequently, on 26-2-1999, the borrower filed the writ appeal challenging the order of the learned Single Judge. The Division Bench by judgment under appeal, inter alia, held that the learned Single Judge, after coming to the conclusion that the guidelines provided in Mahesh Chandra case (1993) 2 SCC 279 were not followed, was not right in directing KSIIDC to make an offer on the same terms on which it had finalised the sale of the property to Vinpack and, therefore, KSIIDC was directed to undertake the entire process of selling of the unit again by following the guidelines enumerated in Mahesh Chandra (1993) 2 SCC 279 and by giving an opportunity to the borrower to bring better offer.

7. Learned counsel appearing for KSIIDC submits that a fair chance was given to the borrower to either bring a better offer or a one-time settlement, but the borrower failed to do so; KSIIDC was considerate and sympathetic towards the borrower and having passed an order on 30-3-1995 under Section 29 of the Act, it was not implemented, in view of the fact that the borrower was negotiating with third parties to enter into arrangements to work the unit; the guidelines laid down in Mahesh Chandra (1993) 2 SCC 279 have been overruled and in any case, the borrower was given by learned Single Judge the same offer on which the unit was sold to Vinpack, further directing that on the borrower's failure to pay in the stipulated period, KSIIDC could sell the unit to Vinpack. The borrower neither complied with the directions of learned Single Judge nor obtained any stay or extension of time and, in fact, filed the appeal after expiry of the period granted by learned Single Judge and, thus, by its conduct the buyer could not challenge the sale made to Vinpack which was made as a result of failure of the borrower.

8. Learned counsel appearing for Vinpack, the purchaser also submits that since the borrower failed to comply with the order of the learned Single Judge, KSIIDC rightly sold the unit to it and, thus, third-party interest was created even before the filing of the writ appeal. No interim order was granted by the Court during the pendency of the writ appeal preventing the confirmation of sale in favour of Vinpack. The counsel also submits that substantial investments have been made after purchase of the unit by the purchaser and hundreds of workers are working in the unit. It is submitted that the order of the learned Single Judge was passed on the undertaking filed by the borrower to purchase the unit on the same terms as offered by Vinpack and having failed to comply with the order, sale was confirmed in favour of Vinpack.

9. Supporting the impugned judgment, learned counsel appearing for the borrower submits that KSIIDC is under an obligation to consider the reasons for default and when there are genuine reasons for default, it should cooperate with the borrower by rescheduling the repayment of loan. It has been further submitted that the manner of disposing the unit shows that there was no transparency or fairness and efforts were not made to secure the best price and that the terms and conditions for the borrower to purchase were more onerous.

10. The sale of the unit has been effected by KSIIDC in favour of Vinpack under directions of learned Single Judge, having regard to its right of sale under Section 29 of the Act. Section 29 gives a right to the Financial Corporation inter alia to sell the assets of the industrial concern and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation. This right accrues when the industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations as envisaged in Section 29 of the Act. Section 29(1) gives the Financial Corporation in the event of default, the right to take over the management or possession or both and thereafter deal with the property.

11. The sale was set aside by the High Court relying upon the interpretation placed on Section 29 by this Court in Mahesh Chandra case (1993) 2 SCC 279. The subsequent line of cases have distinguished the decision in Mahesh Chandra case (1993) 2 SCC 279.

12. In U.P Financial Corpn. v. Gem Cap (India) (P) Ltd. (1993) 2 SCC 299 it was held that the High Court while exercising its jurisdiction under Article 226 of the Constitution cannot sit as an appellate authority over the acts and deeds of the Corporation and seek to correct them and that the doctrine of fairness, evolved in administrative law was not supposed to convert the writ courts into appellate authorities over administrative authorities. On the facts of the case it was held that the borrower had no intention of repaying any part of the debt and was merely putting forward one or the other reason to keep the Corporation at bay. While striking down the directions issued by the High Court, this Court held that the High Court had not kept in mind the well-recognised limitations of their jurisdiction under Article 226 of the Constitution and acted as an appellate authority over the actions of the Financial Corporation, in a matter where not a single provision of law was violated. The Court observed that the

Financial Corporations were not sitting on King Solomon's mines, but they too borrow monies from Government or other Financial Corporations and they also have to pay interest thereon.

The Court observed that:

Fairness is not a one-way street and the fairness required of the Corporation cannot be carried to the extent of disabling it from recovering what is due to it. While not insisting upon the borrower to honour the commitments undertaken by him, the Corporation alone cannot be shackled hand and foot in the name of fairness.

The Court pointed out that in a matter between the Corporation and its debtor, a writ court has no say except in two situations: (1) there is a statutory violation on the part of the Corporation, or (2) where the Corporation acts unfairly i.e unreasonably. Mahesh Chandra (1993) 2 SCC 279 was distinguished noticing that it was a case where the debtor was anxious to pay off the debt and had been taking several steps to discharge his obligation and on the facts of that particular case it was found that the Corporation was acting unreasonably.

13. In U.P Financial Corpn. v. Naini Oxygen & Acetylene Gas Ltd. (1995) 2 SCC 754 this Court held that it was not a matter for the courts to decide as to whether the Financial Corporation should invest in the defaulting unit, to revive or to rehabilitate it and whether even after such investment the unit would be viable or whether the Financial Corporation should realise its loan from the sale of the assets of the Company. The Court observed that a Corporation being an independent autonomous statutory body having its own constitution and rules to abide by, and functions and obligations to discharge, in the discharge of its functions, it is free to act according to its own right. The views it forms and the decisions it takes would be on the basis of the information in its possession and the advice it receives and according to its own perspective and calculations. In such a situation, more so in commercial matters, the courts should not risk their judgments for the judgments of the bodies to which that task is assigned. The Court further held that:

“Unless its action is mala fide, even a wrong decision taken by it is not open to challenge. It is not for the courts or a third party to substitute its decision, however more prudent, commercial or businesslike it may be, for the decision of the Corporation. Hence, whatever the wisdom (or the lack of it) of the conduct of the Corporation, the same cannot be assailed for making the Corporation liable.”

14. In Chairman and Managing Director, SIPCOT v. Contromix (P) Ltd. (1995) 4 SCC 595 the Financial Corporation after taking over the unit of the defaulting borrower under Section 29 of the Act issued advertisement inviting offers for sale of the mortgaged assets. An intending purchaser made an offer, and after further negotiations the offer was revised. The revised offer was accepted by the Financial Corporation and the sale was finalised. A writ petition was filed by the borrower challenging the sale, on the ground that the market value of the assets was more than the sale price and the guidelines laid down in Mahesh Chandra (1993) 2 SCC 279 have not been followed. The writ petition was allowed and it was held that the said sale was not conducted in accordance with the guidelines laid down in Mahesh Chandra (1993) 2 SCC 279 inasmuch as (i) the sale was not held by auction and was held by inviting tenders followed by negotiations; (ii) the price for which the properties were sold was low; and (iii) before accepting the offer, no intimation was given to the borrower so as to enable it to make a higher offer. Directions were issued to the effect that the sale effected by the Financial Corporation shall stand set aside if the borrower deposits, in instalments, the sale price as agreed between the Financial Corporation and the intending purchaser. It was further directed that in the event of the non-payment of any one of the amounts on or before the specified dates the said sale shall stand validated. However, the borrower did not comply with the directions and preferred a writ appeal against the judgment of the learned Single Judge. In the said appeal it was held that instead of imposing conditions on the borrower for setting aside the sale by tender even though the said sale was found illegal and opposed to the judgment in Mahesh Chandra (1993) 2 SCC 279 the learned Single Judge ought to have set aside the sale straightaway without imposing any conditions. The Court directed the appellants to put up the unit for sale afresh by giving reasonable time to the borrower to repay the amount which had become due. Feeling aggrieved, the Financial Corporation approached the Supreme Court by preferring an appeal.

15. Allowing the appeal this Court held that in the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold and this can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer. It was further held that public auction is not the only mode to obtain the best price and it could be done by inviting tenders, by giving wide publicity so as to get the maximum price. On facts, it was held that through negotiations, the Financial Corporation was able to secure a revised offer which was more than the price at which the unit had been valued and the borrower had sufficient opportunity, to secure an offer higher, but was not able to bring any higher offer. As regards the valuation of the unit the Court observed that, the value of the plant and machinery could have fallen on account of its being used or due to the same getting outdated and if the value of the unit was higher than the sale price it would have been possible for the borrower to obtain a better offer and his failure to do so negatives the inference that the sale price was low. The Court also observed that, the failure on the part of the Financial Corporation to give intimation to the borrower before accepting the offer made by the purchaser was of little consequence in the facts of the case because the borrower had sufficient opportunity to obtain a higher offer, but he has failed to do so.

16. In Karnataka State Financial Corpn. v. Micro Cast Rubber & Allied Products (P) Ltd. (1996) 5 SCC 65 the issue was whether the Financial Corporation was wrong in rejecting the offer given by the borrower which, after proper evaluation, was considered lower than the offer made by the purchasers. This Court, while upholding the action of the Financial Corporation, held that the guidelines contained in Mahesh Chandra (1993) 2 SCC 279 are in the nature of guidelines for the exercise of the power under Section 29 of the Act and the action of the State Financial Corporation should not be interfered with if it has acted broadly in consonance with those guidelines. The Court reiterated the law laid down in Gem Cap (1993) 2 SCC 299 as regards the scope of judicial review in matters of sale by the State Financial Corporation in exercise of the power conferred on it under Section 29 of the Act.

17. In Haryana Financial Corpn. v. Jagdamba Oil Mills (2002) 3 SCC 496 a three-Judge Bench, while overruling the decision in Mahesh Chandra (1993) 2 SCC 279 held that it was contrary to the letter and intent of Section 29 of the Act and observed that the views expressed in that case were too wide and did not take note of the ground realities and the intended objects of the statute and if the guidelines as indicated were to be strictly followed, it would be giving premium to a dishonest borrower. The views would not further the interest of any Corporation and consequently of the industrial undertakings intending to avail financial assistance and would only provide an unwarranted opportunity to the defaulter, in most cases chronic and deliberate, to stall recovery proceedings. Further, the Court observed that:

“It is one thing to assist the borrower who has intention to repay, but is prevented by insurmountable difficulties in meeting the commitments. That has to be established by adducing material.”

The Court found that the guidelines issued in Mahesh Chandra (1993) 2 SCC 279 placed unnecessary restrictions on the exercise of power by the Financial Corporation contained in Section 29 of the Act by requiring the defaulting unit-holder to be associated or consulted at every stage in the sale of the property. The Court felt that the procedure indicated in Mahesh Chandra (1993) 2 SCC 279 would lead to further delay in realisation of the dues by the Financial Corporation by sale of assets. The Court held that it was always expected that the Corporation would try and realise the maximum sale price by selling the assets by following a procedure which is transparent and acceptable, after due publicity, wherever possible and if any reason is indicated or cause shown for the default, the same has to be considered in its proper perspective and a conscious decision has to be taken as to whether action under Section 29 of the Act is called for. Thereafter, the modalities for disposal of the seized unit have to be worked out. The Court approved the view expressed in Gem Cap (1993) 2 SCC 299 and found it to be more in line with the legislative intent behind enacting the Act.

18. Recently in S.J.S Business Enterprises (P) Ltd. v. State of Bihar (2004) 7 SCC 166 while reiterating the aforestated legal position, it was held that reasonableness of the action of the Financial Corporation under Section 29 of the Act should be tested against the dominant consideration to secure the best price.

19. From the aforesaid, the legal principles that emerge are:

(i) The High Court while exercising its jurisdiction under Article 226 of the Constitution does not sit as an appellate authority over the acts and deeds of the Financial Corporation and seek to correct them. The doctrine of fairness does not convert the writ courts into appellate authorities over administrative authorities.

(ii) In a matter between the Corporation and its debtor, a writ court has no say except in two situations:

(a) there is a statutory violation on the part of the Corporation, or

(b) where the Corporation acts unfairly i.e unreasonably.

(iii) In commercial matters, the courts should not risk their judgments for the judgments of the bodies to which that task is assigned.

(iv) Unless the action of the Financial Corporation is mala fide, even a wrong decision taken by it is not open to challenge. It is not for the courts or a third party to substitute its decision, however, more prudent, commercial or businesslike it may be, for the decision of the Financial Corporation. Hence, whatever the wisdom (or the lack of it) of the conduct of the Corporation, the same cannot be assailed for making the Corporation liable.

(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold and this could be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer.

(vi) Public auction is not the only mode to secure the best price by inviting maximum public participation, tender and negotiation could also be adopted.

(vii) The Financial Corporation is always expected to try and realise the maximum sale price by selling the assets by following a procedure which is transparent and acceptable, after due publicity, wherever possible and if any reason is indicated or cause shown for the default, the same has to be considered in its proper perspective and a conscious decision has to be taken as to whether action under Section 29 of the Act is called for. Thereafter, the modalities for disposal of the seized unit have to be worked out.

(viii) Fairness cannot be a one-way street. The fairness required of the Financial Corporations cannot be carried to the extent of disabling them from recovering what is due to them. While not insisting upon the borrower to honour the commitments undertaken by him, the Financial Corporation alone cannot be shackled hand and foot in the name of fairness.

(ix) Reasonableness is to be tested against the dominant consideration to secure the best price.

20. True, the exercise of the right by a Financial Corporation under Section 29 of the Act should be fair and reasonable. Ultimately, whether the action of the Financial Corporation is bona fide or not would depend on the facts and circumstances of each case.

21. The examination of the facts, in the light of the aforenoted legal principles reveals that KSIIDC acted in a bona fide manner. The procedure followed by KSIIDC to dispose of the assets of the borrower to realise the dues cannot be held to be unreasonable or unfair. The sale was conducted by issuing advertisements in the newspapers. Steps were taken to secure the best price. The question before the High Court was only about the validity of sale to Vinpack and the plea of the borrower was that the unit was sold at a ridiculously low price. The learned Single Judge gave reasonable opportunity to the borrower to pay the same amount as payable by Vinpack failing which the unit was directed to be sold to Vinpack after a specified date. The borrower failed to comply with the order of the learned Single Judge or seek extension of time and also did not challenge it in writ appeal within the time specified in the order of learned Single Judge. Under these circumstances, the unit was sold to Vinpack and the possession handed over to it. The Division Bench, after holding that the procedure adopted was not in conformity with the guidelines enumerated in Mahesh Chandra case (1993) 2 SCC 279 did not examine the effect of offer given to the borrower and not availed by him resulting in the sale in favour of Vinpack. In this view, the approach of the Division Bench cannot be sustained. Further, the subsequent line of cases distinguishing Mahesh Chandra (1993) 2 SCC 279 and the decision in the case of Jagdamba Oil Mills (2002) 3 SCC 496 which overruled Mahesh Chandra (1993) 2 SCC 279 have already been noticed hereinbefore.

22. The submissions about the genuine reason of the borrower for default and about non-cooperation of KSIIDC in not rescheduling loan, are not relevant at this stage as the main issue urged before the High Court was about validity of sale. That apart, it does appear from the facts that KSIIDC had been considerate and sympathetic towards the borrower and gave it ample opportunities. KSIIDC after passing an order under Section 29 of the Act, did not implement it for a considerable time. The correspondence that followed between KSIIDC and the borrower shows that sufficient opportunity was given to the borrower to enter into arrangement with third parties to work the unit. It was only when the borrower failed to enter into arrangements with the third parties or repay the amount, steps were taken to realise the dues. In this regard, the object of enacting Section 29 of the Act has to be kept in mind. As was observed in Gem Cap (1993) 2 SCC 299 and Jagdamba Oil Mills (2002) 3 SCC 496 the legislative intent in enacting the statute was to promote industrialisation of the States by encouraging small and medium industries by giving financial assistance in the shape of loans and advances, repayable within a stipulated period. Though the Corporation is not like an ordinary moneylender or a bank which lends money, there is purpose in its lending i.e to promote small and medium industries. The relationship between the Corporation and the borrower is that of a creditor and debtor. That basic feature cannot be lost sight of. A Corporation is not supposed to give loan and then to write it off as a bad debt and ultimately to go out of business. It has to recover the amounts due so that fresh loans can be given. In that way industrialisation, which is the intended object, can be promoted. It certainly is not and cannot be called upon to pump in more money to revive and resurrect each and every sick industrial unit irrespective of the cost involved. That would be throwing good money after bad money. As observed in Gem Cap (1993) 2 SCC 299 promoting industrialisation does not serve public interest if it is at the cost of public funds. It may amount to transferring public money to private account. Further, the Financial Corporation cannot wait indefinitely to recover its dues.

23. Having regard to the facts of the case and the legal principles abovenoted, the impugned judgment directing KSIIDC to redo the entire sale process cannot be sustained. Therefore, the impugned judgment is set aside and it is held that on failure of the borrower to comply with the directions of the Single Judge, the action of KSIIDC to sell the unit in favour of Vinpack was valid and legal. The appeals are accordingly allowed.